How much is enough for retirement?

How much money will I need to retire comfortably, and am I on track to get there? These are common questions asked by people around the world. Wealth managers will often get asked what the optimal number is. The truth of the matter is the answer is different for everyone. Each person has unique requirements and lifestyle aspirations, which means that what might be enough for some won’t be enough for others.

One of the many roles a wealth manager plays in their clients’ lives is to help them calculate the amount required to allow them to stop working. We refer to this amount of money as a client’s core wealth. Typically, this will afford someone a comfortable retirement, and we would expect this amount of money to draw down over time as one draws an income in the retirement phase. 

Knowing how much you need will help you to become disciplined

There is a common misconception that you must save as much as you can over your lifetime, often to the detriment of your lifestyle. In certain cases, this is completely incorrect and unnecessary. If you have a clear understanding of the amount you need in retirement, not only will it provide some direction and discipline to get there, but it will also give you an indication of what you can use to enjoy your life now. The amount of money over and above that required for one’s retirement is referred to as excess wealth, and the decisions on what to do with this are completely different to that of core wealth. 

I think it’s also important to remember that money is not the only thing that is required to live a comfortable retirement. It’s extremely important to consider your purpose as well. You will need a reason to get out of bed in the morning. If that reason is no longer to go to work, then you will need to fill this gap with something that stimulates you. It’s all well and good having ample money invested, but without purpose and interests in your life this will more often than not lead to an unhappy scenario. Equally, not building happy memories over your lifetime because you believed that every spare cent should be squirreled away for retirement will also not lead to a happy and fulfilled life. It is therefore important to have your core wealth calculated and a clear strategy in place to get you to financial freedom, without negatively impacting some of the other important factors in your life. 

Key factors that will determine how much you will need in retirement

The first step to take is to partner with an experienced and accredited wealth manager, preferably a Certified Financial Planner®. The process that should be followed is often referred to as “lifestyle financial planning”. You need to determine what lifestyle you want to live in retirement. How much money would that lifestyle require on a monthly basis? Would you like to travel in retirement and how often would you need to upgrade your vehicle(s)? These are some of the main things to consider. Once we know these metrics, we use the time value of money to present the value of cash flows into a single number. One would also need to remember that this money will be invested during your retirement phase, which will also have a factor on the result. That “single number” is your core wealth. 

Now that you have the number in mind, how do you get there? 

In the same way that you can present value your lifestyle requirements, you can future value your current investments you’re building up to determine whether you will reach your core wealth target. This of course requires some assumptions, so it’s best to err on the side of caution when doing so and to try not overestimate the possible returns you can achieve on this money. The answer that will jump out at you is binary; either you are well on track to achieve your goal, or you are not. This planning process will result in a clear understanding of where you currently sit with regards to achieving your retirement goals. 

Should you find that you are not going to reach this target, all is not lost, there are some levers to pull. You could try reducing your current outgoings (which would require a budget to be drawn up) or you could temper your lifestyle requirements in retirement. Another consideration is the age at which you stop working. It’s incredible how the results change if you push your retirement age out by a few years. Your wealth manager should be able to take you through all these scenarios. Once you’ve settled on a plan and have a clear line of sight, it will often come with a sense of comfort.  

If you are one of the lucky ones who might exceed their target, you will have some excess wealth. This is money that won’t be used up in your lifetime and would require a different set of decisions. Do you want to leave a legacy to your family or perhaps donate some money to charity? The way this money is managed could be very different to your core wealth. 

Top considerations when investing for retirement

How your money is invested is of course an extremely important factor to consider, both pre and post retirement. This is where a wealth manager needs to provide their objective best advice. Your investment solution should ensure you are growing your money in real terms (more than inflation). This is not achieved by keeping your money in cash and will require investing in riskier asset classes such as equities or property. With risk comes volatility, which can lead to high emotion. Emotion is one of the biggest destroyers of wealth. It can result in selling at the wrong time and trying to time the market. This is where it’s important to not manage the money yourself. Rather allow investment professionals to do that for you, particularly your core wealth, with the guiding hand of an accredited wealth manager. 

South Africa has an alarmingly low percentage of people that will be able to retire comfortably. Some studies suggest that less than 6% of the South African population will be financially free in their lifetime. In addition to this, well over half of the population doesn’t have a retirement plan in place. That said, it is highly advisable for everyone to take the first step in their journey to financial freedom before it’s too late.

Dave Cumming is Senior Wealth Manager, Standard Bank Wealth & Investment 

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